Recent Changes in Outpatient Reimbursements

Significant declines in the rate of inpatient admissions and incentives introduced in the Affordable Care Act have led to an increased focus by health systems on outpatient care. This trend has contributed to the recent spike of hospital mergers and acquisitions involving outpatient centers such as doctor practices, surgery centers, and urgent care facilities.

Outpatient reimbursements from Medicare and private insurers are greatly influenced by the setting in which the services are provided and how that setting is classified. Due to the higher reimbursements that hospital settings receive, health systems often convert the billing classifications of acquired clinics or surgery centers to a Hospital Outpatient Department (HOPD). This frequently leads to a dramatic increase in reimbursements, even though the same services are being provided by the same doctors.

Payments to HOPDs are often double or triple the amount paid for the same service under the physician or ambulatory surgery center payment systems. Hospital settings receive elevated reimbursements due to the high cost of operating traditional hospital facilities and to compensate for losses they experience providing critical services to the general public, regardless of ability to pay. Despite this rationale, patients are often frustrated with bills for hospital facility fees and other increased charges following their doctor’s practice converting to an HOPD.

The federal government also took note of the increase in HOPD reclassifications and their impact on Medicare payments. In its annual report to Congress in 2014 and 2015, the Medicare Payment Advisory Commission (MedPAC) recommended that they take action to address this trend. According to MedPac’s reports, the system incentivized hospital systems to increase Medicare’s costs through HOPD reclassifications at a time when Congress was seeking to reduce costs. Congress’s effort to eliminate this incentive was included in the Bipartisan Budget Act of 2015 which was signed into law on November 2, 2015. Section 603 of this Act eliminates the ability to establish off-campus HOPDs. New or reclassified HOPDs are required to be on-campus, defined as within 250 yards of the main building of an inpatient hospital campus.

The Bipartisan Budget Act of 2015 includes a grandfather provision which allows off-campus HOPDs in place before the law was enacted to continue to bill Medicare using HOPD codes. Based on clarifications issued by the Centers for Medicare and Medicaid Services in July of this year, a grandfathered care center cannot expand HOPD services, change ownership, or change locations. Currently, a project that was under construction at the time the law was passed does not qualify for the grandfather provision. The House of Representatives passed the Helping Hospitals Improve Patient Care Act of 2016 which contains a provision that would grandfather HOPD projects under construction at the time the Bipartisan Budget Act of 2015 was signed into law. At the time of this article, the Senate has not yet taken up the bill.

From a real estate perspective, space on inpatient campuses will be even more valuable to healthcare systems as a result of this change. In addition, a building with a grandfathered HOPD tenant could benefit as the tenant will be motivated to renew its lease in order to keep its HOPD designation.

Since the law has taken effect, Caddis has seen a direct impact in the marketplace. We have seen the leverage given to landlords by this law change lead to a hospital system seeking to purchase a building outright during a lease renewal process for an HOPD space. We have also seen deals canceled that would have gone forward prior to the law change, but did not make financial sense at lower reimbursements. In summary, the key to a successful healthcare real estate asset is a keen understanding of our tenants’ business and the multitude of factors that influence their bottom line